African Diamonds' latest AK6 diamond valuation exceeds projections

African Diamonds (AIM: AFD) has received the latest valuation of diamonds from its AK6 mine in Botswana, and at US$162 a carat, the valuation exceeds the company’s previous projections. The valuation is US$23 per carat higher than prices used in the current AK6 development studies. The new valuation also indicates the possibility of a US$200 per carat value at production, African Diamonds said.

"The US$162 a carat value on AK6 diamonds is excellent and substantially higher than previous valuations”, chairman John Teeling commented. African Diamonds is targeting first production at AK6 in late 2011. The latest valuation was conducted by Mercury Diamonds in Geneva, based on 1,760 carats of diamonds.

Mercury also stated that the AK6 diamonds presented "much upside valuation potential" if breakages can be reduced in the mining and processing stages. Accordingly, the company is making changes to its processing plant to minimise diamond breakage and enable the recovery of diamonds up to 350 carats in size.

“Drilling and recovery during exploration broke most of the large Type II diamonds.  The valuers could only value what was in front of them, but noted the potential price increases of 12 to 15% if breakage is reduced or eliminated” Teeling stated. “Typically diamond values rise exponentially with diamond size: in our sample, a 10 ct stone is worth four times, not just twice a 5 ct diamond.  We therefore anticipate that the diamond value could be over US$200 a carat”.  

Furthermore, the processing plant is being re-configured to increase the AK6 start-up capacity from 2 million tons to 2.5 - 3.0 million tons of ore a year, which is expected to have a significant impact on African Diamonds' revenue, cash flow and present value.

However Teeling also noted that the current rough diamond market is volatile, with prices having increased substantially over the past year, and it is not certain whether this trend will continue or if the current levels can be sustained.

The diamond package that was valuated consisted of 1,760 carats of diamonds, from which 1,175.7 carats were recovered from large diameter drill samples, which were subsequently processed to recover diamonds greater than 1 mm. The remaining 584.5 carats were recovered from trench samples and were processed to recover diamonds both at a 1mm and 2mm bottom cut off. Whilst the package also contained large Type IIA diamonds, which were broken during drilling, these samples did not feature in the overall valuation.

"Overall the diamonds from AK6 are deemed to be of very good quality and very attractive to diamond buyers.  Colours are generally very white and the samples showed numerous examples of 'blocky' makeable and strong crystal forms that tend to lead to strong polished yields and demand a premium”, Mercury noted.

Mercury also atated that 34% of the valuation was made up of nine large stones greater than 5 carats and that the value understates the true value proportion of the largest stones.

The AK6 diamond discovery in Orapa, Botswana, is being developed through a joint venture between African Diamonds and Lucara Diamond Corp (TSX-V: LUC), an associate of Lundin Group. African Diamonds currently has a 30% interest in the project and Lucara owns the remaining 70%.

AK6 is situated on ground once held by De Beers prior to 2002, and it was through a De Beers / African Diamonds joint-venture that the pipe was discovered in 2004. Lucara acquired De Beers' stake in the project for US$49 million in November 2009.

Previously, African Diamonds noted that the new Lucara venture is more favourable than the previous De Beers partnership. Under the Lucara partnership, the company has the option to increase its stake in AK6. African Diamonds intends to exercise its option for £5 million and increase its interest to 40%. Another attractive benefit of the new venture is that now African Diamonds has the right to market its own percentage of the AK6 diamonds. In January, Teeling said the company’s position had greatly improved in recent months and Lucara has removed the project’s previous uncertainty.

AK6 currently hosts 51.8 million tonnes to a depth of 400 meters at an average grade of 22 carats per hundred tonnes (‘cpht’) at a modeled diamond value of US$151 per carat.

http://www.proactiveinvestors.co.uk/companies/news/13636/african-diamonds-latest-ak6-diamond-valuation-exceeds-projections-13636.html